Proposal marks the latest effort to improve Americans’ chances of buying a home – but would it work?
With additional reporting by Chris Davis
A top adviser to President Trump floated an idea to boost homebuyer prospects last week that could have big implications for the mortgage industry: a proposal to allow the use of 401(k) funds for a downpayment, part of a recent push by the administration to improve housing affordability.
Kevin Hassett, Trump’s National economic Council director and a reported top contender for Federal Reserve chair (though those chances may be waning) highlighted that potential change as a way of helping Americans cope with surging mortgage costs in an interview with FOX Business’ Maria Bartiromo.
“The typical monthly payment about doubled for an ordinary family buying an ordinary home,” he said. “And the downpayment they needed to buy a home went from about $15,000 to about $32,000. And so there’s a real lot of room to make up.”
Currently, Americans can legally withdraw from their 401(k)s for any reason, including a home purchase, if their plan allows in-service withdrawals or hardship distributions.
But they’ll generally owe ordinary income tax on the amount withdrawn and a 10% early-withdrawal penalty if under the age of 59.5 – meaning that they’re often currently allowed, but it can be expensive.
‘It’s truly a balancing act’
It may be too early to say whether the idea will become a concrete policy, but one financial services professional reported “mixed feelings” about allowing Americans to tap into a retirement savings account to afford a home.
Andrew Samalin, principal at Samalin Wealth, told Mortgage Professional America any reasonable means of helping people get a downpayment was “welcome” – but questioned whether a 401(k) was the best vehicle for buying a home.
“Houses are users of cash. They’re consumers of cash. Retirement plans are generators of cash,” he said. “To the degree that people take out funds from liquidity and from the generation of cash to be used for retirement expenses, I have concerns. To the degree that it helps a first-time homebuyer establish themselves as an owner over a renter, I applaud that.
“So I would wait to hear some of the details and some of the potential options to unwind the distribution from the retirement account from the administration.”
A prominent sticking point remains the idea that Americans will be left with less money for retirement by removing funds from their 401(k) to buy a house.
“The reality is that there will be a higher cost structure and there will be less in the retirement account,” Samalin said. “It’s the retirement account that’s going to pay for your life’s expenses 30, 40, 50 years from now.
“If you don’t have the capital there, you won’t be able to afford the home that you live in. It’s truly a balancing act. That’s why I draw the distinction between a generator of cash versus a consumer of cash.”
Hassett touted a “simple way” to allay fears that withdrawing from a 401(k) for a home purchase would reduce the amount of savings Americans have stashed away by retirement.
Discussions and proposals are still ongoing, according to Hassett – “but suppose that you put 10% down on a home and then you take 10% of the equity of the home and put it in as an asset in your 401(k). Then, your 401(k) will grow over time,” he said.
“As the value of your house grows, you’ll be healthy, have more money for retirement and you’ll have solved the liquidity constraint problem and got yourself a house early in life.”
A potentially consequential year for mortgages
The proposal arrives months after the Trump administration touted another measure it said could substantially improve access to homeownership: 50-year mortgages, an idea that drew strong – and mixed – reaction from the mortgage industry.
Proponents including United Wholesale Mortgage (UWM) chief executive officer Mat Ishbia have supported that concept, arguing that few takers would actually use the mortgage for the entirety of the five-decade term.
Others view it as an idea that would only push a mortgage-free life further into the future for scores of borrowers and keep them in debt for longer.
It remains to be seen whether any of the administration’s proposals to unlock affordability in the housing market will progress anywhere beyond the idea stage. But the fact that they’re being discussed – and that housing affordability has taken center stage in Washington’s list of priorities – suggests an eventful year could be ahead for the mortgage market.
This article is part of our Monthly Spotlight series, which in January focuses on Affordability. Full coverage can be found here.
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